Sunday, June 27, 2004

Corporate HR fadsAlert reader and fellow Don Marquis fan, Dum Luks sent me this op-ed piece from the English edition of the Japanese paperAsahi Shimbun:

`There is no clear evidence that downsizing actually does any good, at least not in the United States.'

In recent years, Japan's kinder and gentler managers borrowed a critical lesson from their more ruthless American counterparts: They learned to downsize. They got serious about trimming their work forces, that in turn boosted profits, and that finally brought the fragile recovery Japan is now experiencing.

It's a nice story, but there is a big problem with it: There is no clear evidence that downsizing actually does any good, at least not in the United States. What? How could that be? Everyone knows that downsizing reduces costs, and cutting costs raises profits. But that is precisely the point.
Everyone is so convinced that downsizing enhances corporate performance that no one bothers to check the evidence, ...

I have been doing some research on the topic recently, and I discovered to my astonishment that the evidence from the United States suggests that downsizing has not improved corporate performance-whether defined in terms of profits, productivity, or stock price-and many studies indicate that it impairs performance.

After all, downsizing may save a company on labor costs, but it also entails substantial costs: The immediate cost of paying off downsized workers, for example, plus the longer-term cost of losing valuable personnel and undermining employee morale.

In one of the most authoritative studies, prominent economists William Baumol, Alan Blinder and Edward Wolff [in the book Downsizing in America] find that downsizing does not improve productivity, lowers stock performance and raises profits-but only by depressing wages. Other studies contend that downsizing does not even increase profits, and one study suggests that layoffs actually decrease profits in subsequent periods.

So if downsizing doesn't help, then why have so many American companies rushed to do it? Several scholars have taken up this puzzle, and they conclude that American managers are so beholden to the myth that downsizing is effective that they do not even bother to check whether it happens to be true. They also contend that managers view downsizing as a social norm, so they do it to preserve or enhance their firm's reputation.

The rest of the piece speaks about the specifically Japanese case and is worth reading. For my part, I find that last statement the most interesting. Most corporations do not downsize because of the results of an honest cost/benefit analysis, they do it because all of the other corporations are doing it. Peer pressure. Management through fads. Even to give them the most credit possible, they do it to appease the investors, who themselves are acting in herd-like response to fads.

To make up for understaffing, companies have run through a whole sequence of supporting fads with self-complementary rationales. First, it was filling in with temp labor. The rhetoric to support this fad was that we just get the help we need when we need it. We’re responding lightning fast to changes in the market. As this was dying out we got the tech boom. Start-ups made everyone a salaried employee and demanded they demonstrate their dedication by working hundreds of hours of unpaid overtime each year (for both of the years they lasted before burning out). Now off-shore out-sourcing and Wal-Mart style return to nineteenth century labor conditions are the magic solutions.

All of these fads were morale killers. Employees have no reason to be loyal to a company that’s not loyal to them. Even where it’s possible to stay, no one expects to stay. In the past, the answer to “what do you do for a living” was some variation of “I am this.” Today you more often hear some variation of “right now I’m doing this.”

All of these companies reduce continuity and institutional memory. Rapid turnover and short-term help are always on the low end of the learning curve. We congratulate ourselves on increases in productivity, but how much more productive would a stable and experienced work force be?

My gut feeling is that these human resources fads are as bad as management fads and as damaging to the corporations as they are for the work force. I’m encouraged to see that people like the anonymous author of this op-ed piece are finally asking the right questions and gathering the data that could prove this.